Social Security Is Bankrupt: Here's How To Fix It

Posted: Aug 07, 2018 10:55 AM
Social Security Is Bankrupt: Here's How To Fix It

The United States has a bankrupt Social Security system.

According to the most recent Trustees Report, the cash-flow deficit is approaching $44 trillion. And that’s after adjusting for inflation.

Even by DC standards of profligacy, that’s a big number.

Yet all that spending (and future red ink) doesn’t even provide a lavish retirement. Workers would enjoy a much more comfortable future if they had the freedom to shift payroll taxes to personal retirement accounts.

This is why I periodically point out that other nations are surpassing America by creating retirement systems based on private savings. Here are some examples of countries with “funded” systems (as compared to the “pay-as-you-go” regime in the United States).

Now it’s time to add Denmark to this list.

Here’s how the OECD describes the Danish system.

There is…a mandatory occupation pension scheme based on lump-sum contributions (ATP). In addition, compulsory occupational pension schemes negotiated as part of collective agreements or similar cover about 90% of the employed work force. …Pension rights with ATP and with occupational pension schemes are accrued on a what-you-pay-iswhat-you-get basis. The longer the working career, the higher the employment rate, the longer contribution record and the higher the contribution level, the greater the pension benefits. …ATP covers all wage earners and almost all recipients of social security benefits. ATP membership is voluntary for the self-employed. ATP covers almost the entire population and comes close to absolute universality. …The occupational pension schemes are fully funded defined-contribution schemes… Some 90% of the employed work force is covered… The coverage ratio has increased from some 35% in the mid-1980s to the current level… Contribution rates range between 12% and 18%.

A Danish academic described the system in a recent report.

As labour market pensions mature, they will challenge the people’s pension as the backbone The fully funded pensions provide the state with large income tax revenues from future pension payments which will also relieve the state quite a bit from future increases in pension expenditures. Alongside positive demographic prospects this makes the Danish system economically sustainable. … a main driver was the state’s interest in higher savings… Initially, savings was also the government motive for announcing in 1984 that it would welcome an extension of occupational pensions to the entire labour market. … Initially, contributions were low, but the social partners set a target of 9 per cent, later 12 per cent, which was reached by 2009. …it is formally a private system. Pensions are fully funded, and savings are secured in pensions funds. …It is also worth noting that the capital accumulated is huge. Adding together pensions in private insurance companies, banks, and labour market pension funds (some of which are organized as private pension insurance companies), the total amount by the end of 2015 was 4.083 bill.DKK, that is, 201 per cent of GDP.

Denmark’s government also is cutting back on the taxpayer-financed system.

… the state has also sought to reduce costs of ageing by raising the pension age. In the 2006 “Welfare Reform”, it was decided to index retirement age with life expectancy… Moreover, the voluntary early retirement scheme was reduced from 5 to 3 years and made so economically unattractive that it is de facto phased out. Pension age is gradually raised from 65 to 67 years in 2019-22, to 68 years in 2030, to 69 in 2035 and to 70 in 2040… These reforms are extremely radical: The earliest possible time of retirement increases from 60 years for those born in 1953 to 70 years for those born in 1970. But the challenge of ageing is basically solved.

Those “socialist” Danes obviously are more to the right than many American politicians.

The Social Security Administration has noticed that Denmark is responding to demographic change.

The Danish government recently implemented two policy changes that will delay the transition from work to retirement for many of its residents. On December 29, 2015, the statutory retirement age increased from age 67 to 68 for younger Danish residents. Three days later, on January 1, 2016, a reform went into effect that prohibits the long-standing practice of including mandatory retirement ages in employment contracts.

And here’s some additional analysis from the OECD.

…pension reforms are expected to compensate the impact of ageing on the labour force… To maintain its sustainability…, major reforms have been legislated, including the indexation of retirement age to life expectancy gains from 2030 onwards. …a person entering the labour market at 20 in 2014 will reach the legal retirement age at 73.5. This would make the Danish pension age the highest among OECD countries. …As private pension schemes introduced in the 1990s mature, public spending on pension is projected to decline from around 10% of GDP in 2013 to 7% towards 2060.

Wow. Government spending on pensions will decline even though the population is getting older. Too bad that’s not what’s happening in America.

Last but not least, here are some excerpts from some Danish research.

Denmark has also developed a funded, private pension system, which is based on mandatory, occupational pension (OP) schemes… The projected development of the occupational schemes will have a substantial effect on the Danish economy’s ability to cope with the demographic changes. …the risks of generational conflicts seem smaller in Denmark than in many other countries. …Overall, the Danish OP schemes are thus widely regarded as highly successful: they have contributed substantially to restoring fiscal sustainability, helped averting chronic imbalances on the current account and reduced poverty among the elderly.

This table is remarkable, showing the very high levels of pension assets in Denmark.

To be sure, the Danish system is not a libertarian fantasy. Government still provides a substantial chunk of retirement income, and that will still be true when the private portion of the system is fully mature. And even if the private system provided 99 percent of retirement income, it’s based on compulsion, so “libertarian” is probably not the right description.

But it is safe to say that Denmark’s system is far more market-oriented (and sustainable) than America’s tax-and-transfer Social Security system.

So the next time I hear Bernie Sanders say that the United States should be more like Denmark. I’ll be (selectively) cheering.

P.S. The good news isn’t limited to pension reform. Having reached (and probably surpassed) the revenue-maximizing point on the Laffer Curve, Denmark is taking some modest steps to restrain the burden of government spending. Combined with very laissez-faire policies on other policies such as trade and regulation, this helps to explain why Denmark is actually one of the 20-most capitalist nations in the world.